Valuations are high. The geopolitical situation is volatile. Monetary policy is hitting a multi-decade turning point. Global growth is slowing. It’s a little bit scary.
You’ll get no argument from me on any of that. You will, however, get some on the logical conclusion you might draw from it: that it isn’t a good time to invest.
If you are in for the really long term – say, in your twenties now and saving for retirement – any time is a good time to invest. If you are in for the medium or even the short term, while you can’t shove money into the market in the same blanket way as a 25-year-old, there is always value somewhere.
Credit Suisse has just released its Global Investment Returns Yearbook, which contains an insane amount of data. The key for the investor has to be long-term returns: 6.4% a year for the US, as measured over the past 119 years, and 4.2% on average for the world excluding the US; 6.4% is great, 4.2% is pretty good too.
So if you are thinking about your Isa this week, what should you put in your new wrapper? The first part of the answer lies in the US, which makes up 53% of the global stockmarket.
Where to find value now
You have to be wary of US equities, for the simple reason that they are expensive on any measure you use. If the returns you make in the future are a direct function of the price you pay today (they are; no arguing on this one, please), that matters.
You will be told over and over that you should never bet against the US – it has always traded at a premium to everywhere else and, thanks to its business-friendly, start-up-supportive environment, good corporate governance, high level of business concentration (plus the high margins that brings) and dedication to property rights, the rule of law and democracy, it always will.
I’ll give the cheerleaders the second bit of this: all these things do make the US attractive. It is hard to imagine its stockmarket being shut down and delivering a 100% loss to its investors, in Chinese or Russian-style, for example. But I can’t give ground on the first part.
The US has not always traded at a huge premium to the rest of the world and it hasn’t always delivered the best returns. Over the 119 years in question, the Credit Suisse yearbook suggests it has been matched by Sweden and beaten by Australia and South Africa.
Since diversification is all, you should have exposure to the US, but do take it carefully. I’d look at the Arbrook/G10 American Equities Fund, which looks beyond basic valuations to find “latency”, or mispriced potential that can be unlocked by the right management in listed companies. The fund was launched at rather a difficult time at the end of 2017 but is still doing fine, up a little more than the S&P 500 since launch and 13.6% so far in 2019.
Also of interest is the Blue Whale Growth Fund, seeded by Peter Hargreaves, co-founder of Hargreaves Lansdown, to run some of his not inconsiderable fortune. It’s global, but currently 64% invested in the US and up 22% since its 2017 launch. The MSCI World Index is up 7%.
Don’t forget emerging markets
You will also need some emerging markets exposure. Again, this is not straightforward. Of course, you want to hold equities in places where the middle classes are developing and the scope for rapid growth is huge. But, as shown by the dismal year emerging markets had in 2018, there are two issues here.
The first is that these markets are heavily influenced by China. When growth falls there, many of them suffer. The second is that the diversification benefits of the bigger emerging markets aren’t what they were. As the yearbook points out: “Today’s emerging markets are mostly dominated by larger global companies. Much of their revenues and profits come from abroad and their fortunes are closely linked to other global equities.”
This increased “interconnectedness” can also be noted in the fact that the big companies listed in developed markets have major operations in emerging markets. If you are going to diversify, attempting to do so by holding global companies listed in different places isn’t going to do the job for you.
Yet emerging markets are already up 9% on the year. If we see a trade peace deal between the US and China, a stabilisation of China’s growth rate and more mutterings from the Federal Reserve, the US central bank, about pulling back from quantitative tightening – the reversal of quantitative easing – they could have a fabulous 2019. As emerging markets are in large part about China anyway, Fidelity China Special Situations (LSE: FCSS).
This brings me to Europe and in particular to the UK, one of the cheaper markets in the world. Brexit aside, this is odd given that Britain has most of the same attributes as the US.
Plenty of value in small cap stocks
The yearbook has a good look at what types of stocks work best for long-term investors. Every year the conclusions are similar: small companies and value stocks do best. In the UK, £1 invested in 1955 in value stocks, defined as the 40% in the market with the lowest book-to-market ratio, would now be worth more than 20 times the amount generated by £1 placed in growth stocks.
The small-cap effect is even more interesting. £1 in large-caps in 1955 would have been worth £1,112 by the end of 2018. £1 in small-caps would have been worth £6,941 and £1 in micro-caps a rather lovely £28,833. Now you’re talking real returns. (You can read more on how to find value in small and micro-cap companies in this week’s issue of MoneyWeek. If you’re not a subscriber – sign up now.)
The value effect has been dull of late as the years since 2007 have been all about growth. So have the small-cap effects (everyone loves a multinational). But both are showing signs of returning.
With that in mind, have a look at the Aurora Investment Trust (LSE: ARR), one of my own investments. It’s small, with a market capitalisation of £116m, concentrated, with only ten to 20 holdings and value-orientated, the idea being to buy stocks when they are trading at 50% or more below the manager’s idea of their “intrinsic” value.
On the small-cap side, history suggests you might as well go micro (with a small part of your portfolio): the Miton UK MicroCap Trust (LSE: MINI) is another element in my investment line-up.
The funds mentioned above are not going to make up a fully balanced portfolio. You might want to make that part easier by buying a few all-round multi-asset funds such as – another of my holdings – the Personal Assets Trust (LSE: PNL), which has a good 10% of its assets in gold. Another worth looking at is the McInroy & Wood Balanced Fund.
• This article was first published in the Financial Times